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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI [CAMP: MADURAI]
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE
आदेश /O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:
These are appeals filed by the assessee against the orders dated 26.02.2013 of the Commissioner of Income Tax (Appeals), Tiruchirapalli. was pressing only the grounds relating to addition of interest on non- performing assets, disallowance of provision for bad and doubtful debts and disallowance of ex-gratia payment to employees who were not covered by payment of Bonus Act. Ld.counsel also submitted that for assessment year 2009-10, there was one other ground which he was pressing, on disallowance of employees gratuity related payment to LIC. Grounds other than on the above issues having not been pressed are dismissed.
Appeal for assessment year 2007-08 is first taken up for disposal.
The assessee, a co-operative bank, headquartered in Tiruchirapalli, had filed return of income originally on 12.11.2007 admitting NIL income. The assessment was completed under Section 143(3) of the Income-tax Act, 1961 (in short 'the Act') accepting the NIL income determined by the assessee. Thereafter the said assessment was set aside by CIT, Trichy, invoking his power under Section 263 of the Act. In the fresh assessment proceedings, assessee claimed exemption from tax on the basis of principle of mutuality. However, the Assessing Officer was not impressed. He made by the assessee to its employees, and the claim for deduction for provision for bad debts in excess of what according to him was not in line with Section 36(1)(viia) of the Act.
Aggrieved, assessee moved in appeal before the CIT(Appeals).
The CIT(Appeals), during the appellate proceedings, noted that assessee had not accounted for accrued income on non-performing assets. As per the Ld. CIT(Appeals), assessee was not a scheduled bank and Section 43D of the Act was not applicable to it. Thus, the CIT(Appeals) held that assessee had not accounted for overdue interest of `18,16,42,584/- on its non-performing assets. Thus, the Ld. CIT(Appeals) made an addition of `18,16,42,584/-.
Vis-à-vis provision for bad debts, Ld. CIT(Appeals) noted that the assessee-bank did not work out average aggregate rural advance in respect of rural branches. According to Ld. CIT(Appeals), it was for the assessee to categorize its branches as rural branches and non- rural branches in accordance with the definition in Explanation (ia) given below Section 36(1)(viia) of the Act. The Ld. CIT(Appeals) noted that though the assessee gave the break-up of outstanding advances in the rural branches as on 31.03.2006 and 31.03.2007, it did not 01.04.2005 to 31.03.2006 and 01.04.2006 to 31.03.2007. Hence, the Ld. CIT(Appeals) held that the assessee’s claim could be considered only when it was able to give correct working of the average aggregate rural advances for application of Section 36(1)(viia) of the Act and working out the allowable provision for bad and doubtful debts.
7. Insofar as ex-gratia payment was concerned, as per the Ld. CIT(Appeals), by virtue of the judgment of Hon'ble Apex Court in Southern Technologies Ltd. (320 ITR 577), the claim was rightly disallowed. As per Ld. CIT(Appeals), such payments were covered by Section 36(1)(ii) of the Act and therefore, what was not allowable under the said Section could not be allowed under general Section 37(1) of the Act.
Now before us, the Ld. AR for the assessee submitted that interest on NPA could not be considered for addition since classification of non-performing assets was as per the prudential norms of Reserve Bank of India. Ld. AR submitted that Section 45Q of Reserve Bank of India Act, 1934 had an overriding effect. In any case, as per Ld. AR, even though Section 43D of the Act did not apply to a co-operative bank, by virtue of the judgment of Hon'ble Bombay High 24), interest on non-performing assets, which was not accrued or treated as income by the assessee, could not be thrusted on the assessee, on the basis of principles of accrual. .
9. Insofar as disallowance of the provision for bad debt was concerned, the Ld. A.R. submitted that the assessee was unable to work out such provision in accordance with Section 36(1)(viia) of the Act due to paucity of time. According to him, the Ld. CIT(Appeals) himself had pointed out that if assessee was able to show the provision to have been made in accordance with Section 36(1)(viia) of the Act, to that extent the claim could be considered. As per the Ld. A.R., if assessee was granted one more chance, it would correctly work out the average aggregate rural advance and the claim under Section 36(1)(viia) of the Act.
10. Insofar as payment of ex-gratia was concerned, Ld. A.R. submitted that this was paid to employees who were not covered under the Payment Bonus Act and was necessarily incurred for the purpose of business and to maintain cordial relationship with the employees. order of the CIT(Appeals).
We have perused the orders and heard the rival contentions.
Insofar as interest accrued on NPA is concerned, we are of the opinion that the assessee was bound to follow classification of NPA in accordance with prudential norms prescribed by Reserve Bank of India. It is not disputed that the assessee had not shown any income accrual of interest on non-performing assets in its accounts. Hon'ble Bombay High Court in the case of Deogiri Nagari Sahakari Bank Ltd. (supra) had held as under at para 6 to 11 of its judgment:
“6. The learned counsel, Mr. Alok Sharma, appearing for the appellants- Revenue submits that, the assessee in all these cases are the co-operative banks and not scheduled banks, therefore, the special provisions of section 43D of the Income-tax Act will not be applicable to them. Learned counsel further submits that, in view of the provisions of section 145 of the Income- tax Act, the assessee-co-operative banks have to follow either the mercantile system of accounting or cash system. They cannot have mixed system of account. The learned counsel also submits that, the RBI directions under the Reserve Bank of India Act are prudential norms but have nothing to do with the computation or taxability of the provision of the NPA under the Income- tax Act. Learned counsel further submits that though the RBI directions deviate from the accounting practice as provided by the Companies Act but they do not override the provisions of the Income-tax Act and they are operating in different fields. The learned counsel for the appellants-Revenue, lastly, submits that the learned Tribunal ought to have held that the assessee co-operative bank does not satisfy the conditions of the Central Board of Direct Taxes Circular No. F. 201/81/84/ITAII, dated October 9, 1984, and, therefore, could not avail of the benefits of the circular. On the basis of the aforesaid submissions, the learned counsel further submits that substantial question of law involved in the above appeals and, thus, the order passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961, are required to be confirmed. Learned counsel for the appellants submits that the Tribunal ought to have allowed the appeal by relying on the judgment in the matter of Southern Technologies Ltd. v. Joint CIT reported in [2010] 320 ITR 577 (SC) ; [2010] 2 SCC 548.
The learned counsel for the respondent-co-operative banks submit that the issues involved in the above appeals are no more res integra in view of the decision rendered by the hon'ble Supreme Court in the case of UCO Bank v. CIT reported in [1999] 237 ITR 889 (SC) ; [1999] 4 SCC 599.
8. Learned counsel for respondent submits that the learned Tribunal has rightly dismissed the appeals of the Revenue by confirming the order passed by the Commissioner of Income-tax (Appeals). There is no substantial question of law involved in these appeals and, thus, all the appeals are liable to be dismissed.
The Income-tax Appellate Tribunal has referred the case of Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Delhi). In this case, the Revenue relied upon the decision of the hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra). The learned Income-tax Appellate Tribunal has reproduced the observations made by the Delhi High Court while referring the said case of Southern Technologies Ltd. (supra). The assessee herein being a co-operative bank also governed by the Reserve Bank of India and thus the directions with regard to the prudential norms issued by the Reserve Bank of India are equally applicable to the co-operative banks. The hon'ble Supreme Court in the case of Southern Technologies Ltd. (supra) held that the provisions of section 45Q of the Reserve Bank of India Act has an overriding effect vis-a-vis income recognition principle under the Companies Act. Hence, section 45Q of the Reserve Bank of India Act shall have the overriding effect over the income recognition principle followed by co- operative banks. Hence, the Assessing Officer has to follow the Reserve Bank of India Directions, 1998, as held by the hon'ble Supreme Court.
The honourable apex court in the case of UCO Bank's case (supra) had an occasion to consider the nature of the Central Board of Direct Taxes Circular and the hon'ble apex court has thus held that the Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circular in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act, it is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Further, a similar issue was raised about interest accrued on a "sticky" loan which was not recovered by the assessee-bank for the last three years and transferred to the suspense account, would or would not be included in the income of the assessee for the particular assessment year. The hon'ble apex court has observed that : "The method of accounting which is followed by the assessee-bank is the mercantile system of accounting. However, the assessee con siders income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues but only when it is rea lised. A mixed method of accounting is thus followed by the assessee- bank. This method of accounting adopted by the assessee is in accordance with accounting practice. The assessee's method of accounting, transferring the doubtful debt to an interest suspense account and not treating it as profit until actually received, is in accordance with accounting practice up to the assessment year 1978-79 the taxability of interest on doubtful debts credited to suspense account will be decided in the light of the Board's earlier Circular dated October 6, 1952, as the said circular was withdrawn only in June, 1978. The new procedure under the Circular of October 9, 1984, will be applicable for and from the assessment year, 1979-80. All pending disputes on the issue should be settled in the light of these instructions. Therefore, up to the assessment year 1978-79, the Central Board of Direct Taxes's Circular of October 6, 1952 would be applicable; while from the assessment year 1979-80, the Central Board of Direct Taxes's Circular of October 9, 1984 is made applicable. In the present case, the assessment was made on the basis of the Central Board of Direct Taxes's Circular on October 9,1984, since the assessment pertains to the assessment year 1981-82 to which the Circular of October 9, 1984, is applicable . . . If, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officer's should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under sec tion 119 of the Income-tax Act. Such a circular is binding under sec tion 119. The Circular of October 9, 1984, therefore, provides a test for recognising whether a claim for interest can be treated as a doubtful claim unlikely to be recovered or not. The test provided by the said circular is to see whether, at the end of three years, the amount of interest has, in fact, been recovered by the bank or not. If it is not recovered for a period of three years, then in the fourth year and onwards the claim for interest has to be treated as doubtful claim which need not be included in the income of the assessee until it is actually recovered. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a 'sticky' loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The Circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the sus pense account is, in fact, arising in respect of a doubtful or 'sticky' loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received . . . There is no inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the Income-tax authorities in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the department . . . The relevant circulars of Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act ; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the asses see in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act."
The learned counsel for the respondent has placed reliance in a case of Mercantile Bank Ltd. v. CIT reported in [2006] 283 ITR 84 (SC) ; [2006] 5 SCC 221, where similar question was raised before the apex court. The question was whether the assessee is liable to be taxed under the Income- tax Act, 1961, in respect of the interest on doubtful advances credited to the interest suspense account. In this case, UCO Bank's case (supra) was also referred and the hon'ble apex court has allowed the appeal to the extent of question raised as aforesaid. Furthermore, the respondent co-operative banks, as understood by section 43C of the Income-tax Act on the scheduled bank.
12. Learned counsel for the appellants-Revenue placed reliance on the judgment in the case of Southern Technologies Ltd. v. Joint CIT reported in [2010] 320 ITR 577 (SC) ; [2010] 2 SCC 548. However, this judgment pertains to non-banking financial companies. UCO Bank's case (supra) and Mercantile Bank (supra) case squarely applies to the facts of the present case and issues involved. We, therefore, do not find it necessary to interfere in the judgment of the Appellate Tribunal. We hold that no substantial question of law arises in these appeals.”
It may be true that Section 43D of the Act would not be applicable to the assessee since it was a co-operative bank. However, by virtue of the judgment of Hon'ble Bombay High Court, reproduced above, primacy has been given to Section 45Q of the RBI Act. We are, therefore, of the opinion that interest on NPA could not have been added to the income of the assessee. In taking this view, we are also fortified by the judgment of Hon'ble Karnataka High Court in the case of CIT v. Shri Siddeswar Co-operative Bank Ltd. (2016) 96 CCH 128, considering the importance of prudential norms of RBI based on Vol.I of Tannans Banking Law & Practice in India. We, therefore, delete such an addition.
Ground No.8 stands allowed.
Insofar as provision for bad debt is concerned, the only pleading of the assessee is that it should be given a chance for working out average aggregate rural advance for the purpose of application of Section 36(1)(viia) of the Act. The CIT(Appeals) himself noted at para 6.4 of his order that when figures of aggregate average advances are correctly furnished by the assessee, the deduction of provision can be re-worked and allowed. Considering these facts, we are of the opinion that the matter can be revisited by the Assessing Officer. We set aside the orders of the lower authorities with regard to disallowance of provision for bad and doubtful debts and remit the issue back to A.O. to consider afresh in accordance with law.
Assessee is directed to furnish the information called for by the Assessing Officer with regard to average aggregate rural advances of its rural branches correctly.
Coming to the claim of ex-gratia payment, it is not disputed that these payments were made to the employees of the assessee, who were not covered by payment of bonus under Bonus Act. It is also not the case of the Revenue that the employees of the assessee, who were paid the ex-gratia, were shareholders or persons entitled for share of profits or dividend. This being the case, in our opinion, such ex-gratia to employees who were not covered under the payment of Bonus Act, could not be considered as paid for a purpose which was not wholly for the purpose of assessee’s business. Section 36(1)(ii) of the Act has no applicability to payments made to employees who were not eligible for share of profits or dividend.
Ground No.10 stands allowed.
In the result, assessee’s appeal for assessment year 2007-08 is partly allowed for statistical purposes.
Coming to the assessee’s appeal for assessment year 2008-09, there has been no addition made by the Ld. CIT(Appeals) for interest accrual on NPA. The only two grounds on which Ld. AR argued and which are relevant for the appeal for assessment year 2008-09 are the payment.
Insofar as provision for bad and doubtful debts, we give similar direction as given at para 14 above in relation to assessee’s appeal for assessment year 2007-08.
Insofar as ex-gratia payment is concerned, we are of the opinion that for same reasons as mentioned by us at para 16, it could not have been disallowed. Such disallowance stands deleted.
Taking up the appeal of the assessee for assessment year 2009-10, here also we find that no addition has been made by the Ld. CIT(Appeals) or A.O. for interest accruals on NPA. The only grounds pressed by the Ld. A.R. relatable to the appeal for assessment year 2009-10 were on provision for bad and doubtful debts, ex-gratia payment and gratuity paid to LIC.
Insofar as provision for bad and doubtful debts is concerned, we give directions given in para 14 above, for assessment year 2009- 10 also. that disallowance was incorrectly made. For same reasons mentioned by us at para 15 above in relation to assessee’s appeal for assessment year 2007-08, we delete such disallowance.
Coming to the issue of disallowance of payment of `1,40,60,607/- to Gratuity Fund of LIC, the amount added back by the assessee in its computation is mentioned by the A.O. in the assessment order as `3,90,366/-. As per the A.O., assessee could not give clarification details of the payment. Though a ground in this regard has been raised by the assessee before the CIT(Appeals), Ld. CIT(Appeals) had not given any specific finding. We also find that the assessment order itself was very cryptic on this issue and had not given any details regarding payment of Gratuity and why it was being disallowed. Considering the facts and circumstances, we are of the opinion that the question regarding allowance of Gratuity payment requires a fresh look by the A.O. We set aside orders of the authorities below in this regard and remit the issue regarding payment of Gratuity, back to the file of the Assessing Officer for consideration afresh, in accordance with law.
As already mentioned by us, none of the grounds for any of the years were argued by the assessee’s representative.
To sum up, appeals of the assessee for all the assessment years are partly allowed for statistical purposes.
Order pronounced on 3rd March, 2017 at Chennai.